Steven R. Rowley - President, Chief Executive Officer & Director Dave Powers - President Craig Kesler - Executive Vice President - Finance and Administration and Chief Financial Officer.

Trey H. Grooms - Stephens, Inc. L. Todd Vencil - Sterne Agee CRT Brandon Jaffe - Goldman Sachs & Co. John Baugh - Stifel, Nicolaus & Co., Inc. Brent Edward Thielman - D.A. Davidson & Co. Garik S. Shmois - Longbow Research LLC Adam Robert Thalhimer - BB&T Capital Markets Jim R. Barrett - C.L. King & Associates, Inc.

Scott Schrier - Citigroup Global Markets, Inc. (Broker) Christopher Earl White - Thompson Research Group LLC William Davis Paddock - Invesco Advisers, Inc..

Good day, everyone and welcome to Eagle Materials Third Quarter of Fiscal 2016 Earnings Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Eagle's President and CEO, Mr. Steve Rowley. Mr. Rowley, please go ahead, sir..

Thank you and welcome to Eagle Materials conference call for the third quarter of fiscal year 2016. Joining me today are Craig Kesler, our Chief Financial Officer; and Bob Stewart, Executive Vice President-Strategy, Corporate Development and Communications. It is also my pleasure to announce that Dave Powers is also joining us today.

Dave currently is our President of American Gypsum and will formally succeed me as President and CEO of Eagle Materials on April 1. My decision to retire is driven by recent elective surgery complications that restricted my mobility and my capability to fulfill what I view is the full set of CEO role dimensions.

The decision while filled with melancholy is appropriate. Additionally, the company, in all aspects, is in the best shape that it has ever been, with an incredibly strong future ahead.

It has always been a personal priority to ensure that Eagle has exceptional bench strength in every key position in the company, up and down the line and to maintain great options for succession, regardless of timing. I've enormous confidence in the team at Eagle today.

We are blessed with a number of executives, who would be fine choices to succeed me, but Dave's interest, energy, experience, and capabilities, make him an unbeatable choice at this time to take the company to the next level.

Dave is a seasoned business leader that has built our Gypsum Wallboard business into the undisputed benchmark performer of the wallboard industry.

Dave has guided American Gypsum's path to becoming the industry's leader in highest customer satisfaction and the lowest cost production, the most important foundational elements of our broader company strategy. His leadership skills and experience are proven and proven at Eagle.

Although Dave does not need my help, I look forward to being available to assist Dave in an advisory role for the next couple of years. And now, I would like Dave to say a few words..

Thank you, Steve. Let me start by saying it's been a pleasure working with you over the last 15 years. You have positioned Eagle for an exciting future. The company is extraordinarily well positioned to capitalize on the current construction up-cycle. I want to make a couple of comments here.

The first is to emphasize that I'm fully committed to advancing Eagle's strategy that's been developed and implemented over Steve's tenure. My appointment should be recognized as a change in leadership only and not a change in strategy or investment priorities.

We will remain focused on profitable growth, improvement through the cycles, we will remain equally committed not to overpaying for the privilege of achieving growth when investing. I firmly believe the only way to be successful through the cycles is to be the lowest cost producer of high quality products delivered with exceptional customer service.

Secondly, I'm fully committed to a multi-year tenure. My ramp-up curve should be short given my experience at Eagle Materials and in the building materials industry. I look forward to sharing our fiscal year results with you this spring. Until then let me turn it back over to Steve to talk about our recent quarter..

Thanks, Dave. There will be a slide presentation made in connection with this call. To access it, please go to www.eaglematerials.com and click on the link to the webcast. While you're accessing the slides, please note that the first slide covers our cautionary disclosure regarding forward-looking statements made during this call.

These statements are subject to risks and uncertainties that could cause results to differ from those discussed during the call. For further information, please refer to this disclosure, which is also included at the end of our press release.

The decline in Eagle's third quarter revenues and segment operating earnings was driven primarily by a shift in the timing of wallboard sales volumes versus prior year's third quarter, associated with a change in timing of our announced wallboard price increase and a dramatic slowdown in our frac sand business versus the prior year.

General construction activity continues to improve across all of our markets, with customers reporting significant backlogs of work.

In Texas where the wettest year on record delayed many construction projects, we anticipate a strain on the supply of construction projects this spring and summer as many of these construction projects are still trying to catch up.

A 4% increase in our average net cement sales price and increased sales volumes were the primary drivers of the increase in Eagle's quarterly comparative of Cement, Concrete and Aggregate revenues.

Sales volumes improved across most of our markets with the decline in our Texas Cement sales volume reflecting another round of wet weather during October and December and reduced demand for our oil well cement products. Cement, Concrete and Aggregate earnings improved 11% versus the prior year, reflecting improved pricing.

Eagle cement companies have announced cement price increase from $7 to $12 per ton across all of our markets. A decline in our Wallboard and Paperboard sales volumes drove a 10% decrease in our quarterly comparative of Wallboard and Paperboard revenues.

Operating earnings in our Wallboard and Paperboard business declined 8% to $45.2 million for the third quarter. Our Gypsum customers are reporting an approximate 5% to 7% increase in their volume needs for calendar year 2016.

Eagle's Oil and Gas Proppants third quarter financial results reflect the difficult business conditions in the oil and gas sector. The near-term demand and pricing outlook for proppants remains limited and we continue to right-size our business appropriately.

We also continue to work closely with our customers to navigate the cycle and strengthen our customer relationships. Now, let me turn this to Craig for more details on the financials.

Craig?.

Thank you, Steve. Eagle continued to generate significant cash flow during the third quarter. Operating cash flow increased 66% to $108.7 million and our financial flexibility has allowed us to wisely invest back into our businesses, small scale capital that further reduces costs and increases Eagle's low-cost advantage.

Nearly 80% of our free cash flow this quarter will return to shareholders in the form of share buybacks and dividends. While at the same time, we reduced our net debt position by nearly $20 million. This last slide reflects the cash flow generation results are highly competitive low cost position. Our net debt to cap ratio was 32% at December 31, 2015.

We thank you for attending today's call. We'll now move to the question-and-answer session.

Liz?.

. Our first question comes from the line of Trey Grooms with Stephens. Your line is now open. Please go ahead..

Hey. Good morning, guys. First off, Steve, I want to say it's been great working with you for the last 10 years or so and we wish you a full recovery and wish you the best in your retirement for sure..

Thank you..

And also Dave, look forward to getting to know you as well and working with you in the years to come too..

Great..

Steve, the wallboard volume was obviously, was down in the quarter, I understand there was some negative impact from the lack of pre-buy that you mentioned in the December quarter.

How are you seeing volumes progress here through the first quarter and are you expecting volumes to rebound here as we progress through, when I say 1Q, obviously the first calendar quarter here?.

Dave, why don't you answer that question?.

Thanks, Steve. Yes, I do, Trey. I estimate over the last several years has been 30 million to 40 million foot of pre-buy from year-to-year. I expect to get that in the January/February timeframe. So yes, our January volume is up substantially..

Great. Good to hear. Sticking with wallboard, pricing flat sequentially, you've got your price increase that's I think was pushed back to the end of March. First off, I guess has there been any change to pricing year-to-date and how should we be thinking about pricing in wallboard as we look through calendar 2016 here..

We have delayed our price increase to the end of March and our plans are still to implement that as our letter had stated. Regarding month-to-month and day-to-day prices, I'm not going to really comment on those. Our last quarter was basically the same as the prior quarter..

Yeah, okay. And then lastly before I jump back into queue, obviously you guys, very strong free cash flow in the quarter, you did return a lot to shareholders with the buyback and then you also reduced some debt, so kudos to you guys on that. But with the stock at these levels, the valuation hasn't been this attractive in my opinion in a while.

This maybe a question for you, Dave, as you take the reins in the next few months, how are you thinking about allocation or capital allocation and kind of balancing M&A versus buybacks, et cetera?.

Craig, why don't you answer that question?.

Sure. Thanks, Trey. So as you saw during the quarter, we've repurchased 870,000 shares and frankly at prices higher than where we're trading at today. So we saw good value during the quarter, we continue to see a very good value at these trading levels on the shares..

All right. Thanks a lot guys. Good luck. I'll jump back into queue..

Our next question comes from the line of Todd Vencil with Sterne Agee. Your line is now open. Please go ahead..

Thanks. Good morning, guys..

Good morning, Todd..

Steve and Dave, I'll just echo what Trey said. Steve, I'm sorry to see you go and I hope everything goes the way you wanted to, and Dave, we'll have a longer conversation later but welcome aboard, at least this part of the process.

Thinking about cement and focusing on Texas, there are a lot of questions out there that investors have had and been talking about and a lot of things have gone on in Texas in the Cement business this year.

I think some capacities come on and there have been declines in oil well demand and lots of rain, which is sort of just kind of shaking things up.

Could you talk a little bit about how that has developed, how maybe the market share and the customer relationships have shaken out so far and then how you see that developing in the next few months?.

Yeah. So, while demand is off, the biggest drop in demand in Texas has primarily been the demand for oil well cement, both in West Texas as well as South Texas. What's interesting to note is demand for construction grade cement is very, very strong in both North Texas and Central Texas and primarily driven by corporate relocations.

Houston is a little more complicated, supply/demand dynamics are a little different there, starting with certainly a bigger impact from the energy sector impacting the demand in Houston. And also little more complicated with the number of importers and the ability to import cement at the Houston market.

Thus, it's really more complicated, more difficult market down in Houston as opposed to the two other very large population centers in the state.

So that's kind of what we see going on, very comfortable with our position, very comfortable with the fact that we also purchase cement and purchase it both imported as well as from other suppliers in the state to not only meet our broad-based customer demand, but our internal consumption.

So, we feel that we still have plenty of levers to do what's right and maximize profitability of Texas Lehigh..

That's great.

Within the state, can you size up for me where you think, sort of ag – sort of total cement demand in Texas is right now in terms of annual tons and where capacity stands?.

Yeah, so there still is a shortage of cement in Texas, capacity has increased a little bit with Lafarge-Holcim starting up a second kiln in Midlothian earlier this year, I think they're still working on some – and I think they have a little bit of time to implement some environmental technology that's required for it to continue to operate going forward.

I think that equipment at least is on order and on its way as I understand. But we are still in an undersupplied market in the state of Texas..

That's fantastic.

And then, you mentioned the price increases, can you talk about the specific, I guess, timing for your various markets of when those cement price increases kick-in?.

Yes. So the timing of cement price increases in our markets it varies from January 1 to April 1. And while it is even a little too early to tell how effective the January 1 price increases will be, in many of our markets, the supply is very tight. And where supply is tight, we feel very strongly that there will be a substantial price increase..

Perfect. Thank you so much, Steve..

Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is now open. Please go ahead..

Good morning. This is Brandon Jaffe here on behalf of Jerry. First, going back to the wallboard pricing cycle. Last year pricing slipped in the spring and summer.

What's your level of confidence on holding some level of your announced price increases this year?.

Dave?.

Jerry (sic) [Brandon], I am not really going to speculate on that, but we are going to attempt to implement our increase as announced..

Okay. Thank you.

And on the frac sand business, how have your plans for CapEx in that business changed since the last quarter, just given the further decline in the market?.

Yes, so, the answer is, last question I was asked that question. It was really answered on a longer-term perspective what was required to build out the facilities, which included some CapEx, the majority of the CapEx, really which was for increased production capacity, which is obviously not needed right now.

But as far as cost reduction projects to further reduce our costs, we have about $15 million scheduled to be spent this year, all with high returns to position ourselves better in the marketplace..

Great. Thank you..

Our next question comes from the line of John Baugh with Stifel. Your line is now open. Go ahead..

Thank you. And best of the luck, Steve. I'm sorry to see you go. I guess my question is on Proppants. They're fairly impressive narrow loss considering how low the volumes are.

Could you give us the sort of fixed cost number, either currently or where it will be for 2016 so that if you, for example, sold, I don't know, $5 million of revenue a quarter in that segment or $20 million for the year, what kind of maximum loss we're looking at?.

Yes. So I think the easiest way for me to answer is that is we had very, very weak December sales, and that's what really negatively impacted our third quarter results. Sales have rebounded quite nicely in January to anticipated volumes.

That should get us back to where what I said a quarter ago or at least for the last couple of quarters that we should be kind of in that cash flow breakeven neighborhood, give or take. And so for us it was just really, really slow sales in December, but we have seen those ramp back up here in January.

So we're feeling a little bit better than we were in December about the frac sand business..

Just to be clear, the D&A annually at that business is running around $25 million, $30 million a year?.

That's right. This pace for this past quarter would be a good pace to use, John..

Okay, super. And then just quickly on the wallboard side. Any input cost comments, I guess I'm thinking about natural gas among other things. But if we saw up volumes, if we saw flat pricing if we just assumed that, we'll get leverage on volume.

Will we get any input cost help?.

We've had some pretty good savings on natural gas, some efficiencies, and yes increased volume will help drive our cost down a little bit. We are controlling our costs and we're running well..

Great. Thank you for that color. Good luck..

Our next question comes from the line of Brent Thielman with D.A. Davidson. Your line is now open. Please go ahead..

Yes. Thanks. And, Steve, all the best ahead. On the cement side, Steve, I think you talked about on the prior call in terms of price increases in the $10 to $15 a ton range and I think you said $7 to $12 today.

Just was kind of curious what's changed in the marketplace or what's going to cause that range to change?.

I think we might have had another market where a price increase was announced at a little lower level. I think that's really what changed there. And then in one of the other markets, maybe somebody came out a little bit lower than a higher price.

But the really good news is, and especially for this time of the year, demand remained strong in all of our markets and our customers are broadly expressing that they will require at least 5% and in many cases 10% increase in their purchases this calendar year.

So there is a lot of positive momentum for construction cement demand in our markets this coming year..

Okay. That's great. And then on the cement JV, as we move into the current quarter, you should have some easier volume comparisons as I know oil well started to come off this time last year.

Weather aside, can we start to think about volumes getting back into positive territory this quarter? Or is it still going to be kind of a process as you ratchet down that oil well cement?.

Certainly, this quarter (20:45) ratcheted out all the downplay in the oil well cement and then it's really just a function of the weather and El Niño. So we'll see. Typically when we get into these patterns, you get very, very strong rains in the fall as well as in the spring. So I'm not sure that we don't have another round of rain coming our way.

We'll see, but when we've been in these patterns in the past, it's really been twice a year that the rains hit..

Got you. And then just last one. The Aggregates business had some nice volume this quarter. I know you operate in a few different territories, including Texas.

Did you essentially not see a weather impact in that business or was demand (21:30)?.

We definitely saw the same impact in Texas associated with weather and in fact it shut our quarry down, flooded our quarry out, washed away a conveyor belt, so we had some extra maintenance cost associated with repairing some damage from the storms..

And sorry, one last, I just thought of it.

Are you having difficulty moving product along the river due to some of the flooding, something we should consider here in the first part of the year?.

Currently not at all..

Okay, great. Thank you..

Our next question comes from the line of Garik Shmois with Longbow Research. Your line is now open..

Hi. Thank you. And just wanted to echo best wishes, Steve, on your retirement. Just wanted a question on wallboard first. You took share in the second quarter, gave back maybe a little bit here in Q3. I think some of the negative volume declines is regional.

But maybe a question for Dave, are you happy with your wallboard share position right now as you head into calendar 2016? And is there any difference in how you're viewing volume versus price?.

It fluctuates from quarter-to-quarter and over the last seven years it's been flat..

Okay. And any change to the volume versus pricing strategy? I think in the past you had prioritized price.

Is that still very much the case?.

No, I'm not going to comment on that..

Okay. I guess switching to cement now. In Texas our math shows about a 3% sequential decline in cement prices quarter-to-quarter, which given the volume declines because of oil well is fairly impressive.

Nonetheless, I just wondering if you could maybe, Steve, talk about if there has been any change to the mix that's impacting price in Texas, or if there is any incremental competitive pressures because of some of the rains and inventories have been built up that's driving some of the changes in sequential pricing..

So clearly, the shift in mix with the oil well has some impact, but as I mentioned, things are a little more complicated in Houston. So there has been a little bit more competitiveness in the Houston market..

Okay. And I guess just lastly looking at wholly-owned cement margins, was there any impact in the quarter? I guess, maybe if you could talk about any benefit from lower energy as opposed to any maintenance that might have occurred in the December quarter, and usually I believe you do maintenance in the March quarter.

Is that still the expectation?.

So the answer is, no. we had a very clean quarter when it comes to the Cement business and very happy with the cost in that quarter..

And Garik, I might add. You mentioned the March quarter for maintenance, that will be more like the June quarter for us with the cement maintenance cost..

Okay. Thank you..

On the costs, there's sometimes we might get some a little early, but in that timeframe..

Okay. Great..

Our next question comes from the line of Adam Thalhimer with BB&T Capital Markets. Your line is now open..

Hey, good morning, guys..

Good morning..

Dave, can you give us any sense of why the cement or why the wallboard prices didn't hold in 2015?.

I just think we had a lot more competitive pressures in the marketplace. And that's my basic answer to that..

Okay.

And then, Steve, what is your mix in Texas, you talked about the three different regions, but what is your percentage mix exposure to those?.

You know, we have exposure in all three markets, with the Houston market primarily supplied through our import position in Houston. But there is also fair amount of – our partner has a fair amount of downstream integration in that market where we had downstream integration in the Central Texas market.

We stay focused as close as we can to the plant, because that's your highest margin and then we reach out certainly to North Texas and South Texas as well from that plant, as required, to fill out the capacity of the plant..

Okay. Thanks for that. And then on the volumes from the cement JV, down 20% year-over-year on average over the last year.

What kind of growth should we expect going forward, I mean, how much of that decrease was the oil wells, and then how much of it was weather?.

Yeah, so our oil well cement business is off 50%, maybe that's 5% of that. The rest is just heavy rain in October and heavy rain in December, so tough rain weather for us this time..

Great. Thank you..

Our next question comes from the line of Jim Barrett with C.L. King & Associates. Your line is now open..

Good morning, everyone..

Good morning..

Steve, congratulations on your accomplishments in your career and good luck in your retirement. Most of my questions are for Craig.

Craig, could you annualize the $15 million in cost savings in the proppant business, what the savings are likely to be?.

With the – oh, in terms of the increment – the capital that Steve referenced in the near term for some cost reduction projects. And there is a lot of them that go into that.

At these volume levels, the impact is important to keep those businesses, that we said, this cash breakeven level, this EBITDA breakeven level, so hard to quantify but very good high return projects with a pretty quick payback period for us..

Okay.

And, Craig, more broadly, could you talk about the company's major capital projects as we look into calendar 2016?.

Sure. So one of the things to start with, as we've said in the past, our kind of what I'll call sustaining capital needs are in this $25 million range, and if were to parse through the numbers year-to-date, we're kind of on that pace. So as we look forward and sustaining capital needs should remain in the $25 million range.

Each year, there's opportunities for expansion of markets through terminals, opportunities like that, the small cost reduction projects. We referenced the cost reduction project in the frac sand business, so, but none of those are major dollar items. You'll see in this past nine months, we spent $38 million in the frac sand business.

The vast majority of that was spent in the first half of the year to finish up the projects in that business and now that those are nearly complete or are complete, the frac sand capital needs will decline significantly..

Okay..

Yeah. Obviously, we had the Skyway acquisition during the summertime. So from a sustaining capital needs of the business, we're going to be back well below where we were this past year this coming year..

Okay. Thanks, Craig. And, Dave, one question for you, and congratulations on your new position. And I did hear your comments about the expected rebound in wallboard volumes.

But in those markets where you sell wallboard with heavy energy exposure, whether it's Texas, Oklahoma, Colorado, have you noticed any muting of demand due to the fact the energy space is in tough shape?.

Not really, my Texas volume total is up. I expect Houston to be flat this year. So no, I really haven't. There is a lot of apartment projects on the books ready to be built, lot of high rises still being built and our customers tell me that it's still going to be strong..

Interesting. Okay. Okay. Well, thank you both very much..

Our next question comes from the line of Scott Schrier with Citi. Your line is now open..

Hi. Good morning. Thanks for taking my questions. I wanted to talk about the comments you made on the spring and this summer.

How you expect to have a significant increase in demand? And because of that increase, do you expect to see the amount of purchase cement needed to fill that demand trending upward and if so what kind of headwinds on margins might we see?.

So the answer is the majority of our imports or our purchase product is in Texas and we're balancing that out with what's happening in Houston.

And so we're comfortable with that, comfortable with the – we're doing much better now in the Midwest and whereas we had been sold out primarily in Texas (31:12) for many years now, two years or three years anyway, in those markets. We're rapidly getting to that point, certainly in the Chicago area.

So now you're starting to see everything start to get stronger and get tighter in those markets and we're also starting to see a increase in the Southern Midwest region with the two new acquisitions. So that'll look strong and even the Reno market is improving.

So I think still the part of Northern California that we play in is still a little weak, but the other markets are very very strong for us as far as cement volume demand..

Great. Thank you.

And just on wallboard, could you talk about any trends that you're seeing as far as non-res demand versus your residential demand?.

We expect both to be up this year..

Okay. Thank you for taking my questions..

Our next question comes from the line of Chris White with Thompson Research Group. Your line is now open..

Good morning. Just one question today. Our Texas Department of Transportation contact shared that the new Prop 1 funding is helping drive additional highway construction and that Prop 1 should even provide a greater boost in 2017.

I was wondering if Eagle was able to take advantage of the new increased funding in TxDOT and if so how?.

So the answer we always watch that and this is really more for our customers and we will work with our customers as they decide to chase this. So we work very very closely to assist our customers to participate in those projects when they go to bid..

Are you able to gauge any type of increased demand from Prop 1 at this time?.

It's little early there..

Yeah..

It's been announced but it just goes hand-in-hand with what I talked about before, you've got a lot of congested growth, okay, associated with this corporate relocation. So we've had a lot of people move into Texas this past year and it's crowded. So, there's need for improvement in the infrastructure of the state..

Great. Thanks for taking my questions..

And our next question comes from the line of Davis Paddock with Invesco. Your line is now open..

Yes. Thanks. Steve, good luck to you in your retirement. Quick question on, just want to clarify on the proppant side, you mentioned kind of returning to a cash flow breakeven, which I guess on the EBIT line would mean kind of that basically a loss in line with the depreciation of $25 million to $30 million.

What level of sales you need to kind of be at that cash flow breakeven level?.

We just have not been discussing that in this environment..

Yeah, I guess Davis, what I'd add is, we also kind of continue to right size the business. So, those fixed costs that we can have some control over we'll continue to work on to manage that business to that breakeven level, almost, however sales dictate that..

Okay.

And so, how much was the December weakness, how much did that impact sales in the December quarter? If it had been normal, how much different would it have been?.

So, they are off like 75%.

Okay?.

Okay. Got it. Great. I think that's all of my questions. Thank you..

Thanks, Davis..

And at this time, I'm not showing any further phone questions. I'd like to turn the call back to Mr. Steve Rowley for closing remarks..

Again, thanks everybody for many great years and many enjoyable calls. I would like now to turn it over to Dave for a final comment..

Steve, I want to thank you for being such a terrific leader over the years. You've been a great mentor to me, and we wish you the best. And we look forward to talking to you in the spring..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day..